Properties v. Welsh

• Decision Date: 26 May 2011
• Docket Number: No. 2010 CA 1913.,2010 CA 1913.
• Citation: 68 So.3d 609
• Parties: SIX C PROPERTIES, LLCv.James H. WELSH, Commissioner of Conservation of the State of Louisiana Office of Conservation and Radius Operating, LLC.
• Court: Court of Appeal of Louisiana — District of US

68 So.3d 609

SIX C PROPERTIES, LLC

v.James H. WELSH, Commissioner of Conservation of the State of Louisiana Office of Conservation and Radius Operating, LLC.

No. 2010 CA 1913.

Court of Appeal of Louisiana, First Circuit.

May 26, 2011.

William Timothy Allen, III, Michael E. Riddick, Paul M. Adkins, Stacey D. Williams, Shreveport, LA, for Plaintiff/Appellant Six C Properties, LLC.J. Blake Canfield, Baton Rouge, LA, for Defendant/Appellee James H. Welsh, as Commissioner of Conservation.Randall C. Songy, Karen D. Ancelet, Lafayette, LA, for Defendant/Appellee Radius Operating, LLC.Before PARRO, GUIDRY, and HUGHES, JJ.GUIDRY, J.

[1 Cir. 2] Six C Properties, LLC (Six C), the surface owner of a substantial portion of land subject to a coal seam natural gas (CSNG) unit established by order of the Commissioner of Conservation, appeals a district court judgment upholding the order.

FACTS AND PROCEDURAL HISTORY

In October 2009, Radius Operating, LLC (Radius) filed an application with James H. Welsh, Commissioner of Conservation (Commissioner) to hold a public hearing regarding the issuance of an order to create a CSNG unit ¹ in the Middle and Lower Wilcox Coal Seam Zone of the East Bayou Castor Field in LaSalle Parish, for the exploration and production of CSNG. Radius defined the area of the unit to be created as “that coal seam natural gas bearing zone encountered between the depths of 2,650 feet and 3,825 feet, electrical log measurements, in the Radius Operating, LLC—LP Mineral Owners et al No. 1 Well, located in Section 28, Township 11 North, Range 2 East, LaSalle Parish, Louisiana, less and except all non-coal intervals encountered within such zone.”

On November 17, 2009, the Commissioner conducted a public hearing in accordance with Radius's application and received evidence relative to the establishment of the proposed unit. Six C appeared at the hearing and offered evidence in opposition to the unit proposed by Radius.

On December 7, 2009, the Commissioner issued Office of Conservation Order No. 1528 establishing the rules and regulations for the creation of a CSNG unit for the Middle and Lower Wilcox Coal Seam Zone in the East Bayou Castor Field (hereinafter referred to as the “East Bayou Castor unit”), with Radius as the unit operator. In issuing the order, the Commissioner specifically found the [1 Cir. 3] creation of the East Bayou Castor unit was necessary to promote the development of a CSNG producing area, to prevent waste, and to avoid drilling unnecessary wells. The Commissioner further found the available evidence was sufficient to reasonably establish the limits of the CSNG producing area and to establish that operation of the East Bayou Castor unit was economically feasible, so that each separate tract within the unit would be reasonably assured an opportunity to recover its just and equitable share of CSNG. Office of Conservation Order No. 1528 authorized Radius to drill as many wells to serve the unit “as may be necessary to efficiently and economically drain” the CSNG producing area. The order exempted any future wells drilled and completed within the East Bayou Castor unit from any spacing-between-wells requirement, but mandated that no well be located any closer than 330 feet to any unit boundary.

Following the Commissioner's issuance of Office of Conservation Order No. 1528, Six C filed a petition for judicial review in the Nineteenth Judicial District Court, naming the Commissioner and Radius as defendants in that action. In the petition for judicial review, Six C alleged that the Commissioner's issuance of Office of Conservation Order No. 1528 was manifestly erroneous and an abuse of discretion. In lieu of arguments, the case was submitted based solely on the agency record and memoranda filed by the parties. The district court rendered judgment “confirming and upholding” Office of Conservation Order No. 1528 in a judgment signed July 12, 2010. Six C devolutively appeals.

ASSIGNMENTS OF ERROR

On appeal, Six C contends that the district court erred in confirming and upholding the Commissioner's order based on the following specified errors:

The District Court erred by confirming and upholding Office of Conservation Order No. 1528 when the evidence in the record showed that the creation of the coal seam natural gas unit was not economically feasible as required by La. R.S. 30:5.2. [1 Cir. 4] The District Court erred by confirming and upholding Office of Conservation Order No. 1528 when the Commissioner abused his discretion by failing to restrict the number of wells or impose spacing between wells.

The District Court erred by confirming and upholding Office of Conservation Order No. 1528 when the evidence in the record failed to establish the limits of the coal seam natural gas producing area.

DISCUSSION

The standard for the district court's review of the Commissioner's order is found in La. R.S. 30:12, which provides that such review shall be conducted by the court without a jury and confined to the administrative record. La. R.S. 30:12(B)(4). The statute further provides:

The court may affirm the decision of the assistant secretary or remand the case for further proceedings. The court may reverse or modify the decision if substantial rights of the appellant have been prejudiced because the administrative findings, inferences, conclusions, or decisions are:

(a) In violation of constitutional or statutory provisions;

(b) In excess of the statutory authority of the agency;

(c) Made upon unlawful procedure;

(d) Affected by other error of law;

(e) Arbitrary or capricious, or characterized by abuse of discretion or clearly unwarranted exercise of discretion; or

(f) Manifestly erroneous in view of the reliable, probative, and, substantial evidence on the whole record. In the application of the rule, where the assistant secretary has the opportunity to judge the credibility of witnesses by first-hand observation of demeanor on the witness stand and the reviewing court does not, due regard shall be given to the assistant secretary's determination on credibility issues.

La. R.S. 30:12(B)(5). Thereafter, if a party is dissatisfied with the judgment of the district court following judicial review, the party is free to appeal the judgment to the appropriate appellate court. See La. R.S. 30:12(D) and 30:15. On appeal, the Commissioner's findings of fact are entitled to great weight and, unless manifestly erroneous or clearly wrong, should not be reversed. Hunt Oil Company v. Batchelor, 93–3144, p. 11 (La.10/17/94), 644 So.2d 191, 200. In reviewing the [1 Cir. 5] conclusions and exercises of agency discretion by the Commissioner, the reviewing court must apply the arbitrariness test, and the party challenging the Commissioner's decision must make a clear showing that the administrative action was arbitrary and capricious. Yuma Petroleum Company v. Thompson, 98–1399, pp. 4–5 (La.3/2/99), 731 So.2d 190, 193.

In 2004, the Louisiana Legislature enacted La. R.S. 30:5.2 to provide authority for the Commissioner to establish CSNG units “when such unit operation will promote the development of such coal seam natural gas producing area, prevent waste,² and avoid the drilling of unnecessary wells.” La. R.S. 30:5.2(B). According to the statute, an order to create a CSNG unit may only be issued after notice and a public hearing and must be based on findings that: (1) the order is reasonably necessary to promote development of a CSNG producing area and to prevent waste and the drilling of unnecessary wells; (2) the unit operation is economically feasible; and (3) the limits of the CSNG producing area can be reasonably established based on sufficient existing evidence. La. R.S. 30:5.2(C).

In its first specification of error, Six C contends the record does not establish that the East Bayou Castor unit is economically feasible. Salar Nabavian, the president of Radius, testified at the public hearing regarding the economic feasibility of the proposed unitization. In conjunction with his testimony, Radius [1 Cir. 6] offered two exhibits prepared by Mr. Nabavian that documented the income he projected would be generated by the East Bayou Castor unit. Mr. Nabavian testified that he is a petroleum engineer with a history of working in various fields of oil and gas exploration. In considering the economic feasibility of the unit, Mr. Nabavian testified that he had a company perform a reservoir study of the project to asses the permeability, porosity, drainage, acreage, and similar features of the project. In light of the study, Mr. Nabavian believed that he could “dewater” the area in a timely fashion to make the project “very economic.” He explained that he had expended a lot of the upfront costs to establish two drilling wells and a saltwater well in the unit due in part to some equipment he patented to help dewater the area. Still, Mr. Nabavian testified that “[e]ven at this point, I already had all indication that I needed that there's coal seams in this particular area that had plenty of natural gas and really, it was a function of dewatering.”

Mr. Nabavian testified that he used information from another CSNG unit in the area, the Riverton Unit CSNG No. 1, to forecast the production and income figures for the East Bayou Castor unit that he listed in exhibits 6 and 7. Mr. Nabavian said that he chose the Riverton unit because it had the longest production history. Based on the raw data from the Riverton unit and his background in oil and gas drilling operations, Mr. Nabavian opined that the project was economically feasible.

Six C points out that the actual numbers reported by Radius for the initial operation of the two drilling wells and the saltwater well reveal that operating costs are much higher and the production amounts are much lower than those projected by Mr. Nabavian in exhibits 6 and 7. While he acknowledged that as of the date of the public hearing, the project had not attained economic...